Your clean energy projects are abundant from storage projects to recycling plastic waste into oil. In order to get your project off the ground, you will need the support of investors who are willing to fund that project. In a recent post, I discussed how to look for CVCs that fit your startup. But you also need to know what CVCs look for in your business. Cleantech venture capitalists, in particular, are wary about investing in projects that are too risky. They may be reluctant to part with the funds you need when they believe that your returns are too slow. And I have discussed that the social responsibility of business in the energy transition is…to maximize the expected future free cash flows (yes, many of you want to argue, but data and history are still on my side…and need I remind you that I too have fallen prey to the irrational exuberance.)
Is your clean energy project a little too risky or too slow to get the financial support you need? Look for these key signs that could be red flags for potential investors.
Sign #1: You’re in the wrong location.
In order to make your clean energy startup work, you need to be in a place that will help you see your dream through to the finish. That may mean a number of different things, depending on the focus of your business.
Are you in a geographic area that supports clean energy technology?
You may feel, for example, that moving into a state where clean energy hasn’t yet become a priority will allow you to reach a wider range of potential customers. The reality, however, is that these areas may not have openings for your clean energy technology. They may be slower to adopt new technologies or resistant to change. Or there might be a good reason why other clean energy businesses haven’t already moved into the area.
California, New York, and Massachusetts, for example, are three of the friendliest policy environments enabling local energy independence.
Is your area excessively saturated with other clean energy startups?
You want to be in an area that supports clean energy developments. However, do you want to locate in areas that are over-saturated? Let’s discuss. I tend to believe that collaboration is critical including being in an ecosystem of other like-minded start-ups and projects.
Are you going to struggle to pay the taxes associated with those areas?
Take a look at the area where you’re considering beginning your startup. If the area has a high cost of living, high taxes, and expensive talent, (I am a Texan, couldn’t resist) it may leave you struggling to pay the bills. In energy, we tend to be more focused on margins, free cash flows, and things that the traditional venture world largely overlooks. Unlike them, we have very few IPO’s and crazy multiples…every penny counts. And failure is not an option in energy.
As many successful entrepreneurs — both in clean energy and in other fields — have already discovered, the area where you begin your startup could have a huge impact on its ultimate success. Before you get started, take the time to do your research so that you’ll have a better idea of the best place for your startup.
Sign #2: You don’t know who you’re marketing to.
When you market your clean energy business, who are you marketing to? What are you hoping to accomplish with your goals? It’s great to have a new plan for advancing clean energy standards or improving energy efficiency. But your business will ultimately be successful only if you know who can make use of that new advance. Before you start pitching your startup to corporate venture capitalists, you need a solid understanding of your buyers. Ask yourself:
Who really needs this advance?
That is, what audience are you attempting to reach? Are you focused on homeowners? Business owners? A specific clean energy sector? If you don’t know, you can’t market your idea, and you can’t finetune it to fit their needs. This may seem obvious, but its not.
What are the pain points of your target audience?
That is, what problems can you solve for them? Both homeowners and business owners, for example, may be interested in cutting energy costs. Business owners may want the stamp of “going green.” While homeowners may simply want to do their part to help protect the environment. Knowing these points makes your business stronger. Not knowing them is a red flag. Do you know if consumers are willing to pay more for local renewable energy? If so, how much more?
How can your clean energy business solve those problems?
What is it that sets you apart from the crowd? Ideally, there should be something about your startup that’s different from all the rest. Be different — whether you’re bringing new technology to the clean energy sector or you’re advancing technology in an area where that technology hadn’t had the opportunity to reach in the past.
In order to attract investors, you must have a solid plan for your business. That includes clearly identifying your buyer personas and developing a strategy for marketing to them. By taking the time to work out these details, you can both substantially increase your odds of success and improve investor interest in your startup.
Sign #3: Businesses like yours have a high failure rate.
Before you start looking for investors for your business, take a look at what other, similar businesses have accomplished in the clean energy sector. Sometimes, you’ll find that clean energy startups like yours have a relatively high success rate. This often helps you appeal to investors.
Sometimes, on the other hand, you’ll find that investors are backing away from the deal because they have seen high failure rates in precisely these types of businesses in the past. This might include types of technology that are too expensive, especially compared to other methods of generating energy, or technology that simply isn’t feasible in the area. If you’re attempting an idea that has gone wrong in the past, you’ll have to take substantial effort to prove yourself to potential investors. Failure has no upside for you or your partners in clean energy.
Sign #4: Your technology doesn’t look substantially more stable than an existing technology.
Advances in clean energy are coming along at an astounding pace. But so are advances in other areas of energy production and storage. Lithium-ion batteries, for example, have seen a massive decrease in price within the past few years. And they are projected to drop even further. This caused the crash of energy giant Aquion, which aimed to produce cheaper batteries for big energy projects (including solar grids). Aquion’s technology was less reliable, less well-known, and simply couldn’t compete with the massive price drops in lithium-ion batteries.
Does your startup have a similar risk?
If it has a high potential cost, investors may not be willing to dive in. Worse, investors may back out quickly if other, similar industries start showing a decrease in their overall costs or an increase in overall efficiency while you are struggling to fully develop your technology. You can have a great idea, but if another segment of the industry gets to the goal of lower cost and higher production first, it could leave you high and dry — and your investors running.
Sign #5: Your R&D team isn’t producing.
Your research and development team is one of the most important aspects of your startup. The team needs to be able to quickly and effectively put together new technological advances that will help keep you competitive in the energy sector. Unfortunately, if your R&D team isn’t already producing — and hasn’t already made some advance or change that will help get your startup moving — you may find that investors are reluctant to take a chance on your business. And while many people say that startups move faster, when it comes to developing new hardware, chemistries, and projects, I am not sure this is always the case. Many times, it is the opposite.
Marketing Your Clean Energy Startup in Spite of Investor Reluctance
Are you finding that investors are reluctant to invest in your business? Do you have several of the warning signs mentioned above? If you’re struggling, there are several ways you can convince corporate venture capitalists to invest in your clean energy startup anyway.
Do your homework.
Get a good idea of what corporate venture capitalists in your area are looking for. Take a look at the businesses they’ve invested in over the past twelve months. What do those businesses have in common? How can you tailor your approach to indicate their similarity?
Show what you’re doing that’s different.
Do you have a clean energy plan that looks like a number of failed businesses in the past? Make sure you fully understand how and why those ventures failed. Then put steps in place to avoid those failures for your own business. Clearly define those steps so that they are easy for potential investors to look over. In many cases, this will help encourage investment success.
Show your successes.
Whether you’ve already launched your startup and are starting to see growth and success or you’ve worked with other businesses, including startups, in the past, show off those successes. Display what you have accomplished in the past so that potential investors will have more confidence in what you can do in the future.
Work with a fantastic research and development team.
This is one area in which you do not want to skimp! With a great R&D team, you’re more likely to accomplish your goals, meet your market’s needs, and continue to produce the advances necessary for your business to stand out in the energy sector.
Finding funding for your startup is an ongoing challenge. Finding funding for a risky startup is even more difficult. By taking steps to mitigate investor risk, you increase the odds that you’ll get the support you need and improve your chances of success at the same time. Do you have more questions about getting your business noticed by corporate venture capitalists? Contact me to learn what CVCs are really looking for and how you can present your clean energy startup more effectively.